Opinions & Ideas

Category: China
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The economic transformation of China is the most important global economic event of the past forty years. It has changed the balance of power on the Eurasian landmass, in ways we are only beginning to comprehend.

The economic transformation of China happened because, since 1979, there has been lively economic competition within China, something that was not allowed in the Soviet model. China’s economy grew, while the centralised Soviet system stagnated. This explains why Communism survived in China, but collapsed in the Soviet sphere. China also grew thanks to the opening up of global trade, under successive rounds of trade liberalisation, which allowed China to build a powerful export sector.

Now China is having to transform itself again. Its export led model has reached its limits. Labour costs are rising because the big transfer of labour from farming to industry is over, and the Chinese population is beginning to age. The working age population of China peaked in 2015 and will decline from now on. Chinese exporters are being undercut by lower wage economies like Vietnam.

The Chinese economy has also reached environmental limits. The pollution level in some cities is dreadful, and the air is dangerous to breathe, even on an apparently clear day. I experienced this for myself when I visited China in the past fortnight on business. Environmental losses reduce China’s GDP by 10%.

The proportion of its population living in cities will grow from 20% in 1978, to 50% today, and to 75% by 2030. This will lead to even more pollution, unless the cities are built to a different model. China is devoting a lot of research to this and may soon become an exporter of green technology. Necessity is the mother of invention.

Meanwhile China has an increasing number of well off, high spending, consumers. The Boston Consulting Group recently estimated that what it calls the “upper middle class” ( a group that can afford regular foreign holidays) will rise from 53 million today, to 102 million by 2020. Interestingly it estimates that, by 2020, the upper middle class in will reach 73 million in Indonesia, 32 million in India, and 21 million in Thailand.

At the other end of the scale, China has not got a well developed welfare system. The income gap is very wide. Stress is high. Parents are left looking after grandchildren back in rural China while sons and daughters seek work in the cities. There is a two tier labour market, under which long established city residents qualify for social supports, but recent arrivals in cities do not, and can remain in a precarious situation for years.

Nationalism is very strong in China, and one can foresee a clash between the American nationalism of Donald Trump, and the Chinese nationalism of the Communist party.

Both can exploit suspicion of the other, to rally political support internally.

The United States should be cautious. The abandonment of the Trans Pacific Partnership, by both Donald Trump and Hillary Clinton, will leave China in the driving seat, as far as trade policy in East Asia is concerned. It is ironic that China increasingly sees itself as the defender of an open world trading system, while the United States adopts protectionist rhetoric. Adding a conflict over the status of Taiwan to this mix could have unpredictable results.

If, under Donald Trump, the US moves closer to Russia, the EU may find its interests aligned more with those of China in some fields, like climate change. This will be reinforced by the anxiety many of the central European members of the EU feel about Russian intentions, and Russia’s view that some of them should properly belong in a Russian sphere of influence, rather than being so closely aligned with Western Europe through the EU. Russian support for west European politicians like Marine le Pen is part of a strategy to undermine the EU.

Historically, China has been a supporter of EU integration, while Russia has been hostile, because it felt itself excluded from pan European security structures. Russia feels itself hemmed in. Russia’s seizure of Crimea, and its involvement in the Syrian Civil War, can also be seen as attempts to break out of its strategic isolation and gain access to the Black Sea and the Mediterranean.

It is also to break out of its sense of isolation, that China has promoted its “one Belt, One Road” policy to link itself with Western Europe.

As a continuing member of the European Union, it will be in Ireland’s economic and political interests to play its full part in building a balanced structure of peace on the Eurasian land mass, that protects the rights of small states, but which also one that ensures that no great power feels itself hemmed in, or isolated. For that is how wars start.

I was in Asia when I read the New York Times obituary of Benedict Anderson posted above.

I confess I had never read any of his books but was struck by the huge contemporary relevance of the quotations from him in this fascinating obituary.

Many of the disturbances in the world today are driven by the phenomenon Anderson spent his life analysing…..nationalism.

For example,

it is nationalism that lies behind the tension between China and its neighbours over islands in the South China Sea.

It is English nationalism that lies behind the UK effort to detach itself from the EU, while still enjoying its benefits.

It is French nationalism that is fuelling the growth in support for the Front National.

And it is, of course, a particularly virulent form of American nationalism that lies behind the anti Muslim, and anti Mexican, rhetoric of Donald Trump and friends.

Nationalism frequently defines itself by the people it is AGAINST, rather than by the values it is FOR.

US Senator Cruz exemplified this aspect of nationalism when ,in a recent speech, he called for “moral clarity” in US foreign policy, defining moral clarity as knowing how to identify America’s enemies!

Unfortunately nationalism often has to pick on violent events to provided cohesion for the “imagined community” that is the “nation”.

In Ireland, for example, we are embarking on a year of celebration of killings and death, in the Dublin rebellion of Dublin in Easter Week 1916, and this rebellion, and the Proclamation that launched it, is being presented as the “founding event” for the Irish nation.

This is historically inaccurate.

The Irish national identity was built, much earlier, by peaceful agitation, by people like Daniel O Connell, Charles Stewart Parnell and others, much more than it was, by the killing and dying of the 1916 to 1923 period. In fact O Connell’s movement was arguably the first peaceful mass democratic movement in the world.

But I fear that will not be not the message that will be conveyed to Irish school children during 2016.

One interesting thing about nationalism is that is so un self critical.

It does not examine the assumptions it makes, whether about

+ who belongs to the nation,

+ who can opt out of the nation,

+ whether a nation is about territory or people and

+ whether the nation comes before the individual or vice versa.

Another thing to note is that nationalism is modern, and not an ancient, ideology.

It came about, as Benedict Anderson says, because the other forces, that previously sufficed to persuade people to cooperate such as a shared religious belief or a shared allegiance to a ruling dynasty, had lost their force . Nationalism has replaced Communism in Easter Europe since 1989.

Nationalism also uses simplifications of history, and mysticism, to avoid asking difficult questions of itself.

This is evident in Japan, in its approach to China and to the legacy of its war in China from 1936 to 1945.

Similar over simplifications and blindness to the other side are also present in the dispute between Israeli and Palestinian nationalisms.

These conflicting interpretations of history make it difficult for people, whose objective interests may actually largely coincide, to cooperate fruitfully with one another.

That is why I believe there should be an open debate about what nationalism really means.

The 150 traditional “nations” of the world ,who met in Paris on our global climate, are all of them far too small to cope on their own with the challenges of global interdependence, global waste, and global environmental degradation. Nationalism does not have an answer to that problem.

While nationalism will always be with us, it needs to accompanied by other, more global, foci for loyalty and common action.

I immensely enjoyed reading “Empress Dowager Cixi” by Jung Chang, published by Vintage Books in 2014.

It tells the story of a well read young girl, named Cixi, from the Manchu aristocracy, who was selected to be one of the concubines of the Chinese Emperor. In 1861, the Emperor died young, without a male heir by his wife. Cixi ,had, however, borne him an infant son, and this son became Emperor

Power was to be exercised on his behalf by Regents.

But, with the surprising connivance of the legitimate wife of the late Emperor, the infant Emperor’s mother, Cixi succeeded in dismissing the Regents, and, along with the old Emperor’s widow, the exercised full power on her sons behalf.

In 1875, her son, the Emperor, died, not long after he reached maturity. Cixi then managed to have another infant, a nephew of hers, named as Emperor.

Cixi thus continued to be the real power in the Chinese Empire, until her death in 1908.

She opened China up to modern ideas in public administration, transport and education. She wanted to learn from the West, so that China would not be dominated by the West.

But Japan had been modernised twenty years earlier than China, and had developed a far stronger army and navy. Japan wanted to control China, or at least the Chinese market. When it did not get its way, Japan defeated China in a war over Korea in 1894. As a result , Japan obtained huge reparations, which further weakened China economically and politically..

Other powers then made demands on China, which, in 1900, provoked a popular, anti foreigner, uprising known as the Boxer rebellion.

Cixi sympathised with the Boxers, and was forced to flee Beijing when her capital was taken by foreign troops from a number of nations, including Britain, Germany and Japan, who had intervened to suppress the Boxers.

The foreign troops could not , however, fully control China without the legitimation of a native Chinese government. Cixi was thus able to return to power in Beijing after the foreign troops had left.

At this stage, having learned the lesson of the failure of the Boxer revolt, she set out to prepare dramatic reforms of China, including an elected parliament and turning the Empire into a constitutional monarchy. The laws for this were passes, but Cixi died before these could be brought into effect.

A few years after her death, the Empire itself was replaced by a Republic . This Republic survived, but not as a democracy as Cixi had envisaged, until 1949.

This book is a dramatic story on intrigue, tragedy and extreme ruthlessness. The character of Cixi, and of her advisors and opponents, is drawn out very skilfully. So also is self satisfied and inefficient social structure of mid nineteenth century China, which Cixi did so much to change, long before China became a republic in 1911.

Cixi’s role has been downplayed by both the Nationalist and the Communist Chinese leaders, because both want to claim the full credit for the modernisations she had, in fact, initiated.

Above all this book is the story of how an intelligent a woman was able to exercise immense power, in what appeared, on the surface, to be a completely male dominated society.

It is also the story of the humiliations suffered by the people of an ancient nation at the hands of foreigners, and explains why China today, is so determined to equip itself to resist unwanted external interference.

I was in China this week. The purpose of the visit was to promote Chinese investment in Ireland.

I met the Irish Ambassador, Paul Kavanagh and his small team, who are working very hard to promote links between Ireland, and what is now the largest economy in the world.

The Chinese economy is being rapidly restructured.

Services are now the largest sector, 48%, as against 41% in manufacturing. There is now less reliance on exports and more on the home market.

Last Thursday, it was announced that China is to end its one child policy. This is a response to the fact that labour shortages will eventually be a problem for China.

This one child policy was first brought into force in 1980.

It has been very effective. The Total Fertility rate globally is 2.5, in developing countries it is 2.7, in the poorest countries it is 4.4, but in China it is only 1.6!

The Chinese population will peak in 2027 and begin to decline thereafter. In this, China is like Europe.

In contrast, the population of Africa could increase from 1.1 billion to 4.8 billion by the end of the century. Africa’s labour force will grow whereas that of Asia will remain stable, and Europe’s labour force will fall. As a result, Africa’s economy could enjoy the fastest growth in the world, over the next century, if it can maintain political stability.

A labour shortage is already evident in China. The number of young people in the 18 to 24 age group today is 108 million, as against 124 million in 2008. The number in that age group will fall by 7 million in each of the next 10 years.

At the other end of the age spectrum, the number of retired people will start to grow rapidly. That is bound to have an effect on the overall productivity of the Chinese economy.

More and more Chinese families now consist of four grandparents, two parents, but only one child.. Growing up as an only child is a very different experience from growing up in a large family and it remains to be seen what effect this will have on society.

Because of the preference of families for sons over daughters, more female babies are aborted, which has led to an imbalance in society. Abortion is contrary to the tenets of traditional Chinese religions, like Taoism, as I saw in a plaque displayed in a temple I visited in Beijing. But it is the policy promoted by the government. The fact that more girls than boys are aborted has not got much attention from the world feminist movement.

The new two child policy will not become effective straight away. Regional laws have to be passed to bring it into effect, and to remove the severe penalties that still apply to having a second child.

There are also practical difficulties in the way of parents who may wish to have a second child. Housing is in very short supply in the big Chinese cities and there will simply not be room for a second child. Already many parents, who have gone to work in the cities, have had to leave their only child behind them in a rural village, to be cared for by a relative, because they cannot find room for the child in the city where they work.

A declining labour force and housing shortages are among a number of challenges China must face at the same time.

The country must also

orientate the economy away from heavy industry to consumer goods

reduce the level of debt of local governments, state owned enterprises, and households. 80% of all public spending in China is done by local governments

reduce reliance on coal as an energy source because coal burning causes so much pollution

The Chinese stock market has fallen 40% from its 2015 peak. By comparison the US market is only 10% down from its 2015 peak, and the Euro zone only 15%.

House prices in major Chinese cities are out of reach of most employees.

Air quality in the same cities is poor because China relies disproportionately on coal as a source of energy.

Meanwhile China does not have a comprehensive welfare state, so Chinese families have to rely on savings, sometimes in the form of stocks and shares, and house property, to provide for their retirement. The fall in the stock market will thus have a direct effect on many Chinese families.

I have visited China a number of times in the last few years.

On one of those visits, in 2013, I drew the attention of my Chinese audience to the then latest IMF report on the country.

It contained warnings that will sound familiar to those who have studied recent Irish economic history.

The IMF talked, even then, of the risks in China of

“a steady build up of leverage eroding the strength of the financial sector”,

“a boom in non traditional sources of credit”, and of the need to take

“steps to reduce moral hazard to ensure that banks do not engage in potentially destabilizing competition” .

On the other hand, The IMF recognised that China has very well capitalised banks.

Most commentators believed that the Chinese Communist party, with its immense concentration of talented people in key positions, would be able to manage the huge structural changes required in the Chinese economy. It was believed they could impose technocratic solutions more easily than would be possible in a democracy.

The changes required include

a managed dissipation of the stock market and housing bubbles,

a shift China away from reliance on investment in physical infrastructure to support the economy, to a western style reliance on consumer spending.At one stage China was pouring up to 40% of its GDP into physical investment. When one is investing to that extent, one is bound to be putting some of the money into projects that will never yield a return.

a shift away from coal to cleaner energy sources and

the inauguration of a welfare state which would facilitate the development of a consumer led economy and less speculative investment by savers trying to provide for their old age

The fact that the Chinese authorities have now had to revert to a policy of currency devaluation is worrying.

It suggests that the authorities are not as firmly in control of the situation as one might have thought, and may not be able after all to manage the structural changes required, without the sort of political turbulence we have seen in democratic countries.

In 2009, I read “The next 100 years – a forecast for the 21st century” by George Friedman

George Friedman is the founder of Stratfor, a Texas-based strategic intelligence consultancy advising many major US corporations. Although described as a conservative Republican, his views would mirror those of many foreign policy realists in both parties.

He assumes that military and economic power will determine the future. As he puts it, “anger does not make history, power does”.

Looking back at the book six years later, it appears to have been prescient in many respects.

He argued in 2009 that the United States would remain the dominant global power for the rest of the 21st century, because of its huge natural resources of coal and oil, its geographic immunity from attack in its fortress of North America, and its control of the world’s seas and of space.

Just as England’s strategic goal, as an island nation and a naval power, was to prevent Europe’s unification under one power coalition, America will pursue a similar policy on the Eurasian land mass. It will not want any one coalition – be it of Russia, China, Turkey or Japan – to dominate that land mass.

He was critical of the way American politicians sometimes approached foreign policy. Because America is so powerful, it has a much bigger margin for error than others, and it sometimes overuses that luxury. He said America is “adolescent in its simplification of issues, and in its use of power”. In general, I do not think President Obama can be accused of this, but some of his Republican critics can.

Other less powerful countries have less margin to make mistakes.

Most significantly in light of current events, he argued back in 2009 that Russia, following the eastward expansion of NATO to within 100 miles of St. Petersburg, was “in an untenable political position” and “unless it exerts itself to create a sphere of influence, it could itself fragment”. This is a credible explanation, offered beforehand, of Putin’s present actions in Georgia and Ukraine.

Both China and Japan he saw as vulnerable, because they are export economies, and they rely on the all powerful US Navy to keep sea lanes open for their exports of goods and their imports of raw material. Since 2009, China has spent heavily on its navy so this prediction may be overturned.

Friedman said that the European Union was a schizophrenic entity, in that its “primary purpose is the creation of an integrated economy, while leaving sovereignty in the hands of individual nations”. The current economic crisis is putting this proposition to the test, and one hopes Friedman will be proven wrong. But he has a point. EU’s states often set ambitious common objectives for themselves, but fail to match them with the necessary central authority.

He argued that there is a divergence of interest between Germany and others who will want easy relations with Russia, and more easterly EU members, who will fear again being sucked into Russia’s sphere of influence. Chancellor Merkel does seem to confronting this dilemma, if reluctantly.

Surprisingly, Friedman did not see China becoming as a great power. This was because of what he saw as its inefficient allocation of capital, its corruption, its profitless exports and its unhealthy reliance on US consumers to buy its goods. Its one child policy will also mean that it soon will be an ageing society. It appears that the current Chinese leadership in confronting these challenges, but reorienting its entire economy will be a very difficult process.

Surprisingly, Friedman saw Japan emerging as the major Asian power, notwithstanding its lack of resources and its very elderly population. I believe this is incredible. An elderly country cannot be a powerful country.

He ignored India altogether. I believe this analysis of the long-term balance of power in Asia was quite unconvincing.

He saw Turkey emerging as the major power across all the former Ottoman lands from North Africa to Central Asia. Here his predictions are more robust in light of subsequent events. He argued in 2009 that Islamic fundamentalism will run out of steam because its real target, the liberation of women, is irreversible. Since he wrote his book, Islamic fundamentalism has actually increased in strength, but he is probably right in the long term.

Friedman speculated about the likely conflicts of the twenty-first century – including its wars. He believed the wars will be conducted by unmanned aircraft using high precision weaponry and guided from space. They will be backed up by small numbers of highly equipped infantry. The aim will be to destroy the electricity generation capacity and close sea lanes of the enemy. There will be modest casualties. Wars, he believed, would be limited, and would end with negotiated treaties. Pursuit of unconditional surrender would be off the agenda, because nuclear weapons would make it too dangerous. All this is true of wars between the big nuclear powers, but are hardly true of what we have been seeing in Ukraine, Syria, Iraq and parts of Africa.

Although some of Friedman’s speculations had a touch of science fiction about them, its basic assumptions about the realities of military power, and it’s reach, are credible and sobering, especially for those who might think that neutrality would protect a country from military conflicts.

For China, the Second World War began in July 1937, and did not end until August 1945. China’s casualties in the war were greater than those of any other nation in the world, apart from the Soviet Union.

Whereas the enmities of the Second World War in Europe have largely been subsumed by the economic integration within the EU, they are still very much alive in the brittle relations between Asian states, notably between Japan and China.

I have just finished reading “China’s War with Japan, 1937-1945, the struggle for survival “ by Rana Mitter, which sets out the background to this brutal war and explores all its complexities.

Throughout the nineteenth century the central government in China had been steadily weakening. The Emperor had to rely on local warlords, raising their own forces to suppress the Taiping Rebellion between 1856 and 1864. The government had to make major trade concessions to western powers and lost effective control of some of its key port and its trade policy. It had to allow foreign troops, including Japanese units, on parts of its territories.

After the overthrow of the Emperor in 1911, the Nationalist Chinese Government of Chiang Kai Shek, began to reduce these foreign privileges, and in 1930 took back control of its own trade policy. This was seen by Japan, which from the early 1930’s could no longer rely on western markets because of the protectionist policies of western powers, wanted to create its own exclusive economic zone, including China.

Japan decided in 1937 that it would demand that China cut its tariffs on Japanese goods, employ Japanese military advisors, and join a military pact ultimately directed against the Soviet Union. It did not intend to conquer China, just to control it.

But a minor incident between Japanese and Chinese troops near Beijing in 1937 escalated into a general war, because the Chinese did not, as the Japanese expected, back down and apologise.

Japanese troops took over large parts of Northern and eastern China, committing major atrocities including the rape of Nanking. There was no outside intervention to defend the territorial integrity of China, by the United States or anyone else. The Chinese retreated inland but did not surrender or make peace, as most people expected they would.

The war in China was costly and Japan needed more resources, and it decided it had to choose between seizing territory and resources from the eastern part of the Soviet Union, or from South East Asia.

It decided on the latter option.

This led to a response from the United States which, in November 1941, demanded that Japan withdraw its troops from both Indochina and China.

Japan saw what was coming and attacked Pearl Harbour a few days later.

This did not solve China’s problem, because the United States gave priority to rolling back the Japanese in the Pacific, and to liberating Europe, over direct US military intervention in China. Indeed the Japanese continued to advance further and further into China right up to 1944. China sensed that it was being treated as a second class global citizen, and that shapes present attitudes, both to the West and to Japan.

I have been in Hangzhou in the past week attending a Global Investment Conference organised by Euromoney. Hangzhou was for a time the capital of China and the biggest city in the world. It is about 200 km from Shanghai, or an hour’s journey on the high speed train, a trip that I was told costs only 10 euros.

Hangzhou was a centre of the silk business and was visited by Marco Polo. Silk from Hangzhou went along the ancient Silk Road all the way to Europe, thereby making Hangzhou one of world’s first globalised economies.

I spoke in Hangzhou just as the Asia Europe Economic Meeting (ASEM) of heads of Government was taking place in Milan. As the President of the European Council, I attended the first ever ASEM meeting in Bangkok in 1996. I met the Mayor of Hangzhou and key commercial and political figures.

Since 2010 there has been a huge surge in outward investment from China in the rest of the world, jumping from 6.1 billion euros to 27 billion euros in just three years. This investment is going into buying high tech companies, companies with globally known brands, and tourist resorts (like Fota in Cork). Just as China’s export drive enabled it, not only to gain income but also to gain market knowledge, this wave of investment is also designed to strengthen China’s global competitiveness and sophistication.

Children in the Shanghai are getting the highest test results in Maths, Science and Reading comprehension in the global PISA tests, which shows that they will provide strong competition for European and Irish children in the global economy. Irish Universities are accepting Chinese students and also investing in developing University facilities in China. This will help China to become a high income economy, its people enjoying lifestyles that will make similarly exorbitant demands on global resources, to the ones already being made by European and American lifestyles consumers.

Wage levels are rising fast in China, as demand for workers is beginning to exceed supply, partly thanks to the one child policy. China is losing low cost jobs to Vietnam and Mexico, so it has no choice but move higher up the value chain.

There is a shift in the allocation of credit away from big, relatively inefficient, state owned heavy(and often polluting) industries, towards privately owned businesses in the consumer goods sector. While the raw GDP growth rates in China may decline as a result, the life style enhancing quality of future GDP will improve.

China is becoming a middle class country, with middle class tastes and material aspirations. With wealth has come anxiety, with many Chinese wanting to invest some of their savings overseas. This provides opportunities for the Irish international financial services industry.

While I was in Hangzhou, the protests in Hong Kong were still under way. The protesters wanted anybody to be eligible for election, not just candidates approved by a single nomination committee. I read an article on this controversy in the “China Daily”, by an Indian Professor, M D Nalapat, entitled “Hong Kong must avoid the democracy trap”, which challenged the notion that, at every level of economic development, democracy is a guarantor of economic success.

He said

“Political chaos can act as a speed breaker for rising Asian economies, dampening the challenge they pose to western counties. Iraq, Egypt, Libya and Ukraine are examples of countries where hundreds of thousands of youths believed that replacing of existing structures through street protest would result in a better life. Instead what they have got are deteriorating living standards and increasing insecurity.”

This is unfortunately a fair comment, and demonstrates the danger of making exaggerated claims of automatic economic advantages from any change of governmental system. Democracy requires patience and self restraint, sometimes absent in recently liberated societies.

Professor Nalapat went on

“Hong Kong is still moving upward, when the present generation in the US and the EU are worse off than the generations preceding it”

This is a superficial comment. Mature economies will never have, or need to have, the same rates of economic growth as economies, like China, which are in the “catch up” phase. Indeed, there is a case to be made that, beyond a certain level of economic development, diminishing returns in human wellbeing and environmental quality set in. 5% plus annual growth rates cannot continue to infinity…..anywhere in the world.

It is not surprising that an article like Professor Nalapats’ should appear in the “China Daily”, but is troubling that it should be written by an Indian, an inhabitant of the world’s largest democracy, a country in which there are 3 million freely elected legislators at differing levels of government, with real competition between parties unlike the tightly controlled system obtaining in China.

But Professor Nalapat is showing that people in the developing world are watching European and North American democracies, as we squabble about how to restore dynamism and optimism in the wake of the 2008 economic crisis, and are drawing conclusions about our systems of government, and the capacity of those systems to enable us to get our economic act together, and democratically to reconcile citizens expectations with economic realities.

I was in the Far East recently doing some work in Singapore on behalf of IFSC Ireland.

It is a part of the world, like Europe, where a sudden bad political development could easily over turn good economic potential.

The approach China is taking to oil exploration in the South China Sea, claiming the whole of the sea for itself, is deeply troubling to its neighbours. We see this in the riots in Vietnam in the past few days. There is, unfortunately, no agreement to jointly exploit the resources under the South China Sea, and that is a continuing source of tension, and is leading to an expensive arms race.

Internal economic problems can often lead to external aggressiveness, as a means of distraction, as we have seen in the case of Russia.

Many of the players in Asia, notably China, Japan and South Korea, despite their rapid recent growth, have internal problems arising from rising income expectations, indebtedness, and ageing.

Wage inflation in China is running at 18%, which will have a long term effect on its competitiveness. Its banking system has many non performing loans.

Japanese corporations are heavily in debt. The Japanese Government has a debt/GDP ratio of over 200%. Japan is one of the most elderly societies in the world, but is reluctant to allow immigration.

A rise in international interest rate would aggravate all these vulnerabilities. Such a rise will eventually happen.

Meanwhile North Korea, with its nuclear arsenal, remains an existential threat to all in the region.

Conflict in East Asia could have disastrous implications for the world economy, because it would disrupt the complex, interdependent, and fragile multinational supply chains on which global manufacturing is now based.

Meanwhile, China and the United States are pursuing competing agendas. Each would like to incorporate East Asian countries into rival economic blocs.

The US sponsored proposed Trans Pacific Partnership does not include China, but China is offering an alternative, less demanding, trade deal to its Asian neighbours. The choice is important.

If Senate Democrats continue to deny President Obama the authority to negotiate trade deals, on which the Senate agrees to vote on as a single package rather than pick apart, there has to be a possibility than the Chinese approach will win out.

This would bring about a significant shift in the global balance of power.

Speech by John Bruton, Former Prime Minister (Taoiseach) of Ireland (1994 to 1997), to a meeting of Zhejiang Chamber of Commerce at the Guangzhou Baiyun International Convention Centre, at 9am on Sunday 1 September 2013.

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I would like to speak, today, first about the Chinese economy and some of the challenges it faces, which have also been faced by my own country, Ireland.

Second, I would like to say something about the global political economy, and particularly about Europe and the euro.

A COUNTRY TRANSFORMED

The last time I was here in Guangzhou was in 1978 when, as a relatively young member of the Irish legislature, I came here to observe the beginning of the modernisation of China , under the leadership of the late Chairman Deng.

My impression, at the time, was that everybody travelled by bicycle, and wore uniform clothes. The sound of China for me, was the tinkle of a thousand bicycle bells. China struck me, then, as a sensibly frugal society, which let nothing go to waste. There was a sense of order, a sense that people knew where they were going.

I also found a people who were was immensely welcoming towards a European like myself, who came from a continent whose interactions with China, over the previous 150 years, had often been marked, on the European side, by exploitation and racism.

I even saw the remnants of the European concessions here in this city, where, until 1949, European nations had applied their own rules, even though on Chinese sovereign territory. In the French concession I came across a disused Catholic church, that had been converted into a clothing factory. I sometimes wonder if it has since been restored to its former use.

I also had a strong sense, then, that China was a society on the move.

Now, 35 years later, I am back in a very different city. In one of the great commercial centres of the world, to see the results of the modernisation initiated 35 year ago.

Most people in the west did not really understand what China was doing then.

THE FOUR MODERNISATIONS

Many may have thought that the Four Modernisations were only rhetoric.

I came across a phrase recently that will probably be familiar to many here, that sums up the Four Modernisations policy initiated here in 1978.

It was that the country was

“wading across a river, by feeling for stones underfoot”.

In other words, it was a policy of experimentation, of trial and error, of allowing mistakes to be made, of trying different approaches in different regions, and allowing competition between the different approaches and the different regions.

This flexibility explains the difference between Chinese and Soviet economic policy at that time, and explains why the first succeeded, and the other failed.

Indeed, the strength of the western capitalist economic model, is that it, too, encourages experimentation and trial and error, but uses different methods to do so.

China has made huge strides since 1978. It is now well established, on an income per head basis, as a middle income country according to World Bank classifications.

FROM A MIDDLE INCOME COUNTRY TO A HIGH INCOME COUNTRY

In 1960, there were 100 middle income countries in the world. Ireland was one of them.

By 2008, only 13 of those 100 countries had reached high income status. Ireland was one of the 13 that made it, along with Hong Kong, Japan, South Korea, Mauritius, Spain, Equatorial Guinea, Portugal and Greece.

The remaining 87 countries, which were middle income countries in 1960, have undoubtedly made progress since, but they are still middle income countries, and some of those who attained high income status by 2008, may now be falling back into the middle income category.

Nothing stands still. Progress to the next stage is not automatic.

Economic growth is, as the economist Schumpeter put it, a process of constant creative destruction. Growth is about change. Change is often painful, and painful, but necessary, change can easily be confused with mindless austerity.

When a country is moving from less developed, to middle income, status, it is often able to compete by doing things , that are already being done, more cheaply than established competitors can do them. It does not have to come up with brand new technologies. it can use existing technologies, but apply at less cost and with minor improvements.

Moving a country, from middle income, to high income status, in contrast, often requires it to push at the boundaries of technology, to find a niche that no one else if filling, to invest in people and ideas as well as in concrete and metal.

That is the stage into which China is now moving its 1.4 billion people, a move that promises to be one of the great transformations of human history.

ENGINES OF ECONOMIC GROWTH

The size of the transformation involved explains why China is today spending 2% of its GDP on Research and Development (R&D), which is more, as a proportion of GDP, than Ireland, Netherlands, the UK, Norway, Luxembourg, Italy, and Spain and many other European countries are spending.

But R&D alone will not move a country from middle to high income status. It must be made easy for entrepreneurs to use the R&D, by setting up new businesses and to recruiting talented local people to help them do it.

Here, Ireland has a strong advantage in that it is one of the easiest places in Europe to set up a new business, and one of the easiest in which to recruit young well educated people at competitive salaries.

This has already attracted 18 different Chinese companies to set up operation in Ireland. Ireland is particularly interested in Chinese companies that are in fields like Life Sciences, Clean tech, financial services and information technology.

Ireland is also active in food exports to China ,which have grown by 92% in just two years!

I believe there are aspects of the Irish educational system from which China could benefit . 5000 Chinese students study in Ireland. Numerous agreements exist between Irish and Chinese Universities. These must be built upon, especially in key areas of research ,like financial services.

REMOVING BLOCKAGES IN THE SYSTEM

If China is to exploit its investment in R&D to the full , it needs to liberalise its system of local residency permits, which discourage migration within China, and to make it easier for new Chinese companies to set up, in competition with existing state owned or established enterprises.

The European Union, with its 0.5 billion people is a much smaller entity than China with its 1.4 billion people, but in the European Union, there are still restrictions on internal migration, analogous to the Chinese residency permit scheme, in that the EU does not have full transferability of Social Security rights, and full mutual recognition of professional qualifications, for internal migrants within the EU.

THE DANGER OF PROPERTY BUBBLES….THE IRISH EXPERIENCE

But it would be unrealistic for me to come here and fail to refer to some of the recent economic difficulties Ireland has encountered. These difficulties are being overcome. Growth has been resumed, foreign investment in the country is at an all time high, and the government is following a careful plan. But it is also important to analyse objectively how Ireland got into these difficulties, and I believe that would be helpful to a country, like China, that is also undergoing rapid development and wants to avoid converting that into a destructive bubble.

Indeed, the latest IMF report on China, contains warnings that will sound familiar to those who have studied recent Irish economic history. It talks of the risks of “a steady build up of leverage eroding the strength of the financial sector”, of “a boom in non traditional sources of credit”, and of the need to take “steps to reduce moral hazard to ensure that banks do not engage in potentially destabilizing competition” in China. On the other hand, it recognises that China has very well capitalised banks.

A few years ago, these risks existed in Ireland, and were not adequately addressed by the authorities in Ireland itself, or in the European Union. We have suffered for that, and these are useful lessons for China.

As I see it, this is what happened in Ireland. Thanks to artificially cheap credit, and rapidly rising property prices, Ireland experienced a property bubble between 2000 and 2007. This bubble led to a radical distortion of the country’s economic structures, and to a big increase in private and government debt.

The cheap credit was available because of decisions taken by the US Federal Reserve and by European Central Bank. Both favoured low interest rates. They did so to avoid dislocations to the economy, that might have arisen from the dot com burst, 9/11, and the costs of German reunification. In these goals they succeeded.

But the extra credit found its way across national boundaries into housing markets in various countries, causing a bubble in prices, most notably in Ireland. In 2008, the bubbles burst.

BUBBLES DISTORT THE ECONOMY

The bubble distorted the Irish economy in ways that will take years to repair. There was distortion in the form of

a doubling in the size of the construction sector,

large and uncompetitive pay increases across the economy, and

rapid increases in numbers of people employed in the public sector. The fact that money flowing in, temporarily, to government coffers, made it hard to resist demands to increase the size of the government sector, permanently.

In just five years from 2001 to 2006, the share of the workforce in the public sector reached 29%, as against 19% in Germany. The numbers in top grade positions in the civil service grew by 86% .

Bubbles misallocate human capital. Instead of choosing careers and skills, for which there is enduring global demand, talented people were drawn, by quick rewards, into activities for which demand is inherently temporary, like construction.

WHY BUBBLES HAPPEN

In a way, it is easy to see why people made the mistake of thinking, in the 2000 to 2006 period, that house prices in Ireland (and household wealth) would never stop rising. Recent history seemed to suggest that the only way house prices could go was up.

House prices had already risen by 133% between 1994 and 2000. These increases were justified by rapid economic growth, immigration, and new family formation, all of which created a genuine demand for housing.

The trouble is that the increase in house prices continued after 2000, and was financed, not by improved competitiveness, but by excessive lending, and by income generated from, inherently temporary, construction spending.

The assumption of the bankers, who were lending this money, seemed to be that demand for housing could go on growing, to infinity. A moment’s thought would have shown how nonsensical that was.

But, in the middle of a boom, people are often too busy, to take a moment to think

The revenue of the Government became unhealthily dependent on taxes derived from property sales such as stamp duty, capital gains tax, and VAT on house sales. Property related revenues reached 18% of all revenues in 2006, whereas they were only been 8% in 2002. But once house sales stopped or slowed down, of course, that revenue growth stopped, leaving a huge hole in the Government’s budget.

Again, a moment’s thought would have shown how dangerous it was, to build up permanent spending programmes, on the back of inherently temporary streams of revenue. But very few people, in politics or outside it, took a moment to think.

For a country like China, the relevant question to ask about Ireland’s recent experience is

“How can sensible, and generally public spirited, people make mistakes like this, and how can such mistakes be avoided ?”

THE CAUSES OF BUBBLES………….SILO THINKING, AND FOLLOWING FASHION, WITHOUT REFLECTION

I would identify two tendencies of policy making in both the public and private sector, that were at the heart of the problem in Ireland

1. “Silo tendencies” within institutions, charged with mitigating risks, where people only thought about their own immediate responsibilities, and did not question wider assumptions.

2. A “consensus approach”, which encouraged a single view to be taken of any issue. Human beings are followers of fashion. We need institutions that deliberately challenge fashionable assumptions, and those institutions did not work, in Ireland or in the wider European Union.

These errors can occur in ANY country, under ANY political system. They are not unique to Ireland, Spain, Arizona, California, Florida, or any of the other parts of the world where property bubbles arose.

China must be wary that these problems do not arise here, and I know the authorities here are fully alive to these risks.

These are the five big problems that the counties of the world must come together to tackle. They are all loosely related to one another. With the exception of the finance problem, they are all problems that are silently creeping up on us, so silently in fact that it is difficult to create a sufficient sense of immediate crisis, to get anything done about them.

Technology will provide some of the answers, and I know China is devoting a significant proportion of its R&D to some of these issues.

But sacrifices and compromises will be needed between and within nations.

Pension entitlements will have to be limited in some countries, working lives extended, and elder care vastly expanded with the aid of technology.

Migration will have to be accepted in ageing economies, and that is a big cultural challenge.

CO2 emissions and pollution will have to be tackled by making the ultimate polluter meet the full cost of what he does.

We may eventually need some form of global taxation, to meet the cost of preserving out common global heritage, but, in the meantime, we need to restore the tax base of states, in a cooperative way. We cannot expect Governments perform functions if its revenues are artificially depleted.

And finally we need to put banking on footing that will be sound enough to allow incompetent banks to be closed down without putting the whole economy at risk. “Too big to fail” and “ too interconnected to fail” should no longer be characteristics of our banking systems.

THE EURO….WHAT IS ITS FUTURE?

The existence of the euro, the single currency, has not created the economic crisis in Europe.

This was going to come anyway because of lost competitiveness, the emergence of new competitors, like China, for traditional European industries, and the progressive ageing of European societies. Expansionary monetary policy could only have postponed the emergence of the symptoms, it could NOT have prevented the illness.

What the existence of the euro has done is impose discipline and mutual solidarity on Europe.

Without the euro, countries would have pursued the route of devaluation and inflation in response to their problems. Savings would have been wiped out. This is not possible now, and that is good. Instead problems are now being tackled at their source.

Without the euro, wealthier and stronger European countries would not have come, so quickly, to the aid of other European countries in difficulty. They have now done so on a systematic basis, and that too is good.

The EU is moving toward a common system for winding up banks that need to be wound up, without putting the overall system at risk. It is moving toward a common system of deposit insurance. These are issues that also require attention here in China.

Much better systems are now being put in place in the European Union, to ensure that, in future, public finances, and underlying competitiveness, do not get out of line again. Out of the crisis, we are now facing up to problems we had ignored for the past 20 years in Europe.

The euro will survive. Not only that, I believe it will eventually be imitated in other parts of the world.

To sum up, the euro

is a protection against the expropriation of savings, through inflation and devaluation.